Better Buy: 3M vs. Emerson Electric

The industrial sector tends to be cyclical, so the very real fear of a recession in 2023 is a risk that potential investors in 3M (MMM 0.14%) and Emerson Electric (EMR -0.25%) need to keep in mind. But that isn’t the full picture, considering that both companies are currently facing their own, company-specific issues. Here’s a quick look at these two historically reliable dividend payers to give you an idea of which one might be right for you.

1.

Dividends

Emerson Electric has increased its dividend annually for 66 consecutive years.

3M isn’t far behind at 64 years. Both are highly elite Dividend Kings. Regardless of what is going on today, you don’t achieve streaks like this by accident.

Think about it — the past six decades have included the Great Recession, the rampant inflation of the 1970s, the technology bust at the turn of the century, and many other headwinds. These two industrial icons have weathered them all while continuing to reward investors with a rising dividend payment.

EMR Dividend Yield data by YCharts

On this point, they are pretty equal. However, Emerson’s dividend yield, at roughly 2.5%, is toward the lower side of its historical yield range. The 5.7% yield at 3M, meanwhile, is higher than it has been in decades.

Using yield as a rough guide to valuation, 3M looks like it’s trading in bargain territory while Emerson seems kind of expensive.

2. Changes

Both 3M and Emerson are making notable changes to their businesses. From a positive point of view, Emerson is shifting toward automation by buying and jettisoning assets, which complicates the company’s financial statements.

New businesses, for example, can boost revenue only because the business didn’t exist in the comparison period. And discontinued operations muddy the waters because the business lines are treated as if they weren’t part of the company even though they were. This shift has been a multi-year effort and it is still ongoing.

That said, Emerson is working from a position of strength as it tries to build around what it believes will be a long-term growth driver. On the other side is 3M, which is currently in the process of spinning off its healthcare business. This has long been viewed as a growth driver for 3M.

However, because of legal and regulatory headwinds (more on this shortly), the company has chosen to hand this business to shareholders as a stand-alone entity. It looks very much like 3M is trying to protect this asset from other issues it is facing and, at the same time, using it to potentially provide cash to deal with the other issues. This is a position of weakness.

3.

Problems

Emerson Electric really isn’t facing too many big headwinds today, other than inflation and the risk of a recession. The same cannot be said of 3M, which is dealing with legal issues surrounding ear plugs it sold to the U.S. military, and legal and regulatory issues related to so-called “forever chemicals” it produces (though it is now working to shutter this business). These problems have already proven to be costly, and there’s no clear sign that they will be resolved soon.

The costs are only going to increase from here, with potentially large figures involved if 3M loses some of the product liability lawsuits it faces. There’s a good reason investors are so downbeat on the stock.

4. The next year

The difference between Emerson and 3M today is highlighted pretty clearly in their organic sales guidance.

Emerson is expecting sales to increase between 6.5% and 8.5% while 3M is hoping organic sales will be flat, but they could decline as much as 3%. Clearly, Emerson is doing much better than 3M today and investors have noticed, given the differences in the yields.

What to do

It would be hard to suggest that either of these industrial stocks is a screaming buy. Emerson is in a better position than 3M, but its yield isn’t historically compelling and there’s still a lot of change taking place.

It might be better for conservative investors to give the transition process a little more time. But growth-oriented investors will probably like the changes it is making and would clearly favor it over 3M. The troubles at 3M, meanwhile, should keep conservative investors away, too, despite the historically attractive dividend yield.

At this point, the stock looks like a special situations play that only more aggressive investors should own.

Given its long and successful history, though, it may be interesting to some.